Pacific Gas and Electric Co. is expected to file this week its response to California state regulators' recommendation that the company face a $2.25 billion penalty for the 2010 San Bruno natural gas pipeline explosion. What impact could the fine have on the company's ability to do business? During today's OnPoint, Chris Johns, president of PG&E, reacts to the proposed penalty and talks about the reforms his company has made after the San Bruno event.
Monica Trauzzi: Hello and welcome to OnPoint. I'm Monica Trauzzi. Joining me today is Chris Johns, president of Pacific Gas and Electric Company. Chris, thanks for coming on the show.
Chris Johns: Thank you.
Monica Trauzzi: Chris, PG&E is expected to release its initial response to state regulators' recommendation that your company face a $2.25 billion dollar penalty for the 2010 San Bruno natural gas pipeline explosion. I know you can't give me the details on the response specifically until it's filed on Friday, however, can you give us a sense of how that response will demonstrate PG&E's commitment to take full responsibility for the incident that happened in San Bruno?
Chris Johns: Well, as you said, we are still finalizing our response, and we will have that on Friday. As we've also said in the past, our concern is that when you look at the excessive size of the suggested penalties that have been proposed by some of the interveners, it gives us concern about the impact it will have on our ability to continue to attract capital into the company and at what cost will that capital be there. We've invested a lot of money over the last couple of years after the terrible accident that occurred in trying to make sure that we have the safest pipeline system in the United States, and our investors have already invested about $1.4 billion over that last two-and-a-half years of shareholder dollars, making sure that we can make those investments as we move forward. And they've been incredible in terms of size and scope. We've validated the maximum allowable operating pressure on all 6700 miles of our transmission pipeline. We've validated through hydro testing or other records over 400 miles of pipeline, and we've invested in putting in now over 67 new valves into our system. Those are numbers that nobody else is doing right now. And so as we look out into the future and know that we still have to invest over $5 to 6 billion dollars a year in infrastructure into our system, we want to make sure that we're able to raise capital to do that at a reasonable cost for our customers.
Monica Trauzzi: So you think that $2.25 billion is excessive. Is there a number you have in mind that you think would be more appropriate?
Chris Johns: Well, I realize that people want to impose a penalty on us for this, and the question is, what's the appropriate size? I'm not going to venture a guess as to what the right number is, other than we want to be in a position where we're making the right investments for the safety of our system, and so that we can serve our customers in the most affordable and safe way.
Monica Trauzzi: Through this recommendation, state regulators are basically saying that your business practices need to be reformed. You've acknowledged the work that you've already done, but do you agree that reform is necessary, and continued reform will be necessary?
Chris Johns: Well, we know that we still have work to do. We've made the investments over the last two years and we know that there's still more investment that needs to be made, and that's what we're focused on. We want to make sure that we are running the safest gas system in the United States, and that means that we're going to have to continue to test pipe, replace pipe, modernize our system, make sure that the records are in place, make sure that our easements are all taken care of, and that's a job that will continue. And it's not just for us, it's across the country, that all of us face that. You know, the pipeline system in the United States is in many instances well over 40, 50, 60 years old, and it needs to be continually updated and replaced, and we as a country have to make those investments. And we have to be able to attract capital at a reasonable price in order to make that investment.
Monica Trauzzi: So in terms of who would pay the penalty, this penalty or another penalty, would that be shareholders who are responsible, and what would the impact be on ratepayers? Would there be an impact on ratepayers?
Chris Johns: Obviously whatever penalty it is is going to be on our shareholders' dollar. But we have to go raise that money. We don't have that money sitting in a bank somewhere where we can just write a check. So we are going to have to go get that money from shareholders. And obviously shareholders expect a return. So the pressure that it puts on us is that it puts on, it may be more costly to go raise that money depending on what the size of the penalty is. And then where it might affect the customers down the road is that we also have to raise money for other investments in terms of our electric system and the rest of our gas system. And when they look at us as an investment, they don't look at us as just a gas pipeline system, they look at us as gas distribution, electric transmission and distribution system, and all that money they're going to expect a return on. So it may just be that it will be more expensive for us to be able to raise that money, which then means down the road for our customers it may be more expensive.
Monica Trauzzi: How has the San Bruno incident affected business and has there been anything that you can point to in terms of how consumers feel about Pacific Gas and Electric Company as a result of the incident?
Chris Johns: Well, there's no doubt that it affected our reputation when the accident occurred. And I think what we've made very clear to all of our customers is that we've learned from this and our first priority was to make sure that we're helping the victims in the communities where the accident occurred, and I think that we've done a good job of continuing to do that and to focus on that. And then second we wanted to make sure that all of our customers understand that safety is our number one priority and that we are dedicated to investing into the system to make it safer and to make it be the safest system in the United States. And we've seen that our customers are getting that message. They are hearing what we're saying and they obviously want to see the proof in it. So we're trying to provide the metrics in a very transparent way so that they can measure our progress over the last couple of years and into the future on how we're doing it making our system safer.
Monica Trauzzi: So let's switch direction and talk about corporate tax reform for a moment. What's happening right now in terms of investor-owned utilities ability to continue to invest in the infrastructure of your company?
Chris Johns: Well, again, it's a big thing for us and for the industry as a whole. We're investing about $5 to 6 billion dollars a year at PG&E in our infrastructure, and the industry as a whole is over $80 billion dollars a year that they're investing. And so the important thing for us is to be able to raise the money in order to make those investments. And about half of it comes from the debt markets and about half of it will generally come from the capital markets. And so you'll want to make sure that as we look at tax reform, that we're understanding the impact that that will have. So for instance, one of the big issues in tax reform that's being discussed is potentially lowering rates, but then getting rid of some of the deductions, including maybe interest deduction. Well, as I said, half of what we have to raise is through debt, and if all of a sudden we are no longer allowed to deduct interest, then that is going to raise the cost to our customers of the product that we serve to them, that we provide to them. So it can be a very large impact.
Monica Trauzzi: All right, we're going to end it right there on that note. I appreciate you coming on the show and talking us through this.
Chris Johns: OK, thank you.
Monica Trauzzi: And thanks for watching, we'll see you.
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